CEO Salaries and Bonuses

The myth of big salaries (it's all marketing)
The failed bankers on Wall Street have been whining that if they have to cut bonuses and salaries dramatically, they'll be unable to recruit great talent, and they need great talent to fix the situation.

And for years, boards have been claiming that they need to pay CEOs $50,000,000 salaries in order to recruit the very best for their companies.

Jamie Dimon at Chase said, "It's possible someone's going to walk in my office and say, Jamie, I have a family. I can't afford to live that way."

This, of course, is nonsense.

After a million dollars or so in salary, the absolute amount that a person is paid has no real impact on their life. They can't eat more meals in a day or wear more shoes. What matters to the manager is the relative amount. How much more would I make over there? Why does that company pay its CEO more than my company pays me?

(Aside: should the guys who drive an armored car that carries millions of dollars in bonds get paid more than the guys that drive an armored car that only carries thousands of dollars in cash? Does the amount of money handled change the difficult of the work?)

Twenty years ago, financial industry salaries were a tiny fraction of what they are today. Did lesser people do the work? Did they try less hard? Think smaller thoughts? Of course not. The reasons salaries are high is that the number is a signaling mechanism, a very expensive marketing campaign.

Law firms went through this cycle twenty years ago. The top firms competed with each other to recruit a too-small pool of talent from the top law schools. Unable to muster up even a mite of marketing insight, they chose to compete on only one axis: salary. So, 24 year olds were given jobs at $120,000 a year, when their peers from college were making 20% of that. The firms could have found great people at half the price, except that with only one axis, they had to be at the top if their peers were.

If you were a law student, the choice was easy. Either you got a job at a firm that proved its worth by paying a lot or you didn't. You didn't have to know anything about the firm, apparently, other than the fact that they were top tier, and the way you knew that was because they paid a lot.

Hence the current situation with CEOs and bankers. There's no real effort made to market the jobs, just to race to the top (or the bottom, depending on your point of view) with the easiest marketing signal of all. Price. Yes, it's exactly the same as a retailer trying to improve business by being the cheapest.

In addition to this being a huge (!) waste of money, it's also provably false as an accurate portrayal of what's necessary to recruit. For every great job at Goldman Sachs, there are still 1,000 totally qualified applicants waiting for that job. So, when demand is high and supply is low, the power goes to the supplier. Lower the salary until you get just a few qualified applicants, right?

This moment in our economic cycle is a great opportunity for shareholders and taxpayers to let the organizations we own and support know that wasting money on this sort of marketing is silly. Just as an industry-wide gas standard would have actually helped Detroit twenty years ago, an industry-wide tax and trade salary cap will actually help these organizations. They'll be forced to recruit with useful marketing techniques (I'd rather work at an innovative, fast-moving, respectful company, given the choice...so the companies would have to make a better 'product,' not just pay a lot as a result of financial engineering).

[I think performance pay is great, risk should be rewarded and stock options are just fine. I also think it's fine for risk-takers and skilled pros to make a ton of money. I'm mostly talking about guaranteed bonuses which aren't bonuses at all, just a bribe to sign on and stay on.]

Sometimes markets get stuck because there is a disconnect between what something costs and what you get. It costs the individuals on the board of a public company nothing to pay more, they get bragging rights and a CEO who is focused on money. And that works until the next board leapfrogs them. The boards themselves should be lobbying to end this practice, but they won't because... guess what... the folks on the boards are the CEOs of other companies. It's stuck.

If you are a relentless free market believer, more power to you. If your company is private, pay yourself a trillion dollars a year, fine with me. In fact, we need more private companies that innovate and pay their staff a ton. But if you're owned by shareholders or bailed out by taxpayers, wasting trillions of dollars because you don't have the guts to market your jobs properly is silly.